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The EU plan to live in a raw materials world



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Hello from Brussels, where the Brexit talks, believe it or not, haven’t yet been resolved. Whatever the real deadline is (agreement on this point is itself elusive), it’s rapidly approaching. Again. Next week is apparently a crunch point, though to be fair Brexit has had more crunch points than a barrelful of Golden Delicious apples, and with similarly little flavour.

Meanwhile, our Christmas list of trade policy buzz-phrases continues to expand. “Patriotic globalism”, which we mentioned last week after we spotted a former deputy US trade representative using it, got another shout-out over the weekend from Liz Truss, UK trade secretary, boasting about Britain’s new bilateral deal with Canada. (See also Tall Tales below.) Also, New Zealand’s formidable top trade negotiator, Vangelis Vitalis, reminded us via Twitter that the Kiwis and their Asia-Pacific pals including Chile and Singapore got in the game a while back with “strategic resilience”, and a real corker, “concerted open plurilateralism”. Lovely ring to it, though we’re not sure how you can have plurilateralism without acting in concert. Maybe it’s as opposed to disconcerted plurilateralism, of which there is lots.

Anyway, a big-up to the concerted guys from Wellington, Santiago and Singapore, and a strategically resilient festive season to you all. Keep them coming — we’re envisaging a range of Christmas cards, maybe an advent calendar. Today’s main piece is on the EU’s valiant attempts to diversify its access to the critical minerals the economy needs, while our chart of the day shows how coronavirus vaccine hopes have set off a rush for emerging markets.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to or email me at

The Aussies come to Europe’s rare-earth rescue

OK, so enough with the rarefied EU rhetoric about open strategic autonomy and resilient supply chains and what have you. Let’s get down to cases. Specifically, if Europe is to break its dependence on inputs from China, where will all the raw materials to make the magnets that run electric vehicles come from?

Tricky one. The EU this week launched one of the more substantive initiatives of its supply chain strategy, a “raw materials alliance”. The partnership of companies, business associations and governments wants to secure access to a total of 30 critical inputs by increasing domestic production and recycling and looking abroad for friendly suppliers. The list of sensitive materials has more than doubled over the past decade, familiar suspects including rare earth elements lately joined by lithium, titanium and bauxite.

Even for instinctive free-traders like us, this seems fair enough: the risk of relying on spot sourcing on world markets is obvious. China supplies 98 per cent of the EU’s rare earths, and has exploited that bottleneck in the past by putting on export controls, diverting output to its own manufacturers and driving up global prices.

A worker at the site of a rare-earth metals mine in Jiangxi province, China © Reuters

But it’s going to be a struggle. Some of the problems are obvious and longstanding, such as the EU’s environmental and social regulations deterring mining. The EU’s largest known deposit of rare earth materials, Norra Karr in Sweden, was declared off-limits to further exploration by the Swedish supreme administrative court in 2016 because of environmental risks, and reversing that decision would be difficult.

Other problems reflect the peculiarities of the materials involved. Supply chains for rare earths and the like are particularly hard to diversify. It’s not like finding a new source of crude oil. The materials have multiple stages — mining, concentrating, separating and processing — which are expensive, complex and dirty. It’s politically and economically cheaper to outsource the nastier bits to Chinese producers, but a monopoly over even one link in the chain gives China leverage over the whole thing.

So when the EU goes looking for supplier countries to produce materials to feed into its manufacturing, it wants stable, environmentally sensitive and economically advanced allies capable of replicating the whole value chain. Several sets of ears around the world prick up at this, but few as eagerly as those in Canberra. Australia has rich rare earth deposits, and while its green record is not exactly perfect — the climate change denialism of some of its politicians is unhelpful — in terms of environment and labour standards it’s certainly not China.

Spotting an opportunity, Australia’s famous high-performance export promotion engine has purred into action. The government created a “critical minerals facilitation office” in January to position Australia as a reliable supplier of said commodities, and is doing outreach. The office’s head, Jessica Robinson, told a seminar including European officials and business types last week that the processing, separation and mining of minerals all needed to be brought on stream to give advanced manufacturing economies such as the EU a full-range service. “It really takes a co-ordinated collective effort,” Robinson said. “There is a need to help the private sector appreciate the sense of urgency in needing to invest in raw materials that are going to be needed to support downstream activity.”

But a patched-together network of companies in Australia and the EU with limited public support is going to struggle to compete against Chinese producers. China already has an entire “mine-to-magnet” value chain for the components, and its own advanced manufacturing in sectors such as electric vehicles to boot. People in the materials industry say China is also capable of maintaining its dominant position by indefinitely subsidising costly parts of the process, deterring competitors. The US and others won a World Trade Organization case against China in 2014 against export controls on rare earths, but other companies in the business reckon China manages to manipulate quantities and prices along the supply chain nonetheless.

We wish the EU, and indeed Australia, luck. The bloc has identified a genuine problem and is mobilising what tools and alliances it can. But it’s up against Beijing in a game of low costs, lax standards, managed prices and state handouts in a mass-production industry with a dominant position in strategic commodity markets at stake. China tends to win those most of the time.

Charted waters

The coronavirus crisis sparked a record flight out of emerging market assets, with more than $90bn leaving bonds and stocks in March alone, according to the Institute of International Finance. But now the asset class is making a comeback. And as Wall Street sets out its big ideas for 2021, EM is top of the list.

Line chart of MSCI emerging markets indices, rebased showing emerging markets are back in the black

Tall tales of trade

Liz Truss
UK trade secretary Liz Truss says the UK can become ‘the ideas factory of the world’ © Henry Nicholls/Reuters

Sometimes you come across a tall tale that’s disappointing because it conceals a more interesting truth. Last week the UK and Canada announced they had successfully rolled over the EU-Canada bilateral deal for the moment and would negotiate a full new trade agreement next year. UK trade secretary Liz Truss went straight off into Tall Tales territory with a newspaper column claiming that the deal showed the two countries were moving forward together as “free trade pioneers” and that the UK could become “the ideas factory of the world”.

The grandiosity was duly ridiculed: a not-quite-entire rollover of an existing agreement originally negotiated by someone else isn’t exactly the repeal of the Corn Laws. But it also rather unfairly hides the fact that Britain’s civil servants have actually done pretty well to get the deals with big trading partners such as Korea, Japan and Canada replicated before the cliff-edge of leaving the EU trade regime at the end of the year.

We’ve been sceptical that the UK’s trade negotiating set-up is conducive to making the trade-offs required to deliver big new agreements, a judgment which remains to be tested. But given what a shambles most of Brexit has been, it’s good to see that Britain’s famously smart technocratic civil servants can ameliorate at least some of the damage done by ideologue politicians. Let’s just focus on that, and leave becoming the ideas factory of the world for another day.

Don’t miss

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  • The Australia-China relationship has been deteriorating for some years, but the downward spiral has accelerated in recent months. Two tipping points stand out this year — the Australian call for an independent inquiry into the Covid-19 outbreak, and police raids on Chinese-Australians and Chinese media in Australia over allegations of covert interference in domestic politics.
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Emerging Markets

Australia’s treasurer warns global stimulus threatens financial stability




Australia has warned that unprecedented global stimulus efforts during the coronavirus pandemic are creating financial stability risks that will only intensify when interest rates inevitably rise.

Canberra has also defended tough new foreign investment rules that have led to a collapse in Chinese investment, arguing the number of proposed deals motivated by strategic, rather than purely commercial gain, was increasing.

Josh Frydenberg, Australia’s treasurer, said the Pacific nation was in a strong economic position as its net debt to gross domestic product was about half that of other advanced economies, even as it begins unwinding fiscal stimulus.

“There is no doubt elevated debt levels will create challenges for many countries. While global interest rates are low those debt levels can be serviceable — but there will be a time when the monetary policy settings change,” he told the Financial Times.

Frydenberg’s comments on the risks posed by global stimulus followed a similar warning delivered last week by Peter Costello, a close political ally and former Australia treasurer.

Australia will be among the first advanced economies to taper off Covid-19 fiscal stimulus with the closure of its A$90bn (US$70bn) JobKeeper wage subsidy scheme this month.

Canberra has argued that the recovery is already under way, citing a fall in unemployment to 6.4 per cent in January and a 3.3 per cent economic expansion in the three months to September last year.

Frydenberg, who counts Margaret Thatcher and Ronald Reagan among his role models, said the government’s A$250bn stimulus was required to stabilise the economy during the pandemic. But he said JobKeeper, which supported 3.6m workers at its peak, was no longer needed as the recovery could be supported by tax cuts, which were announced last year.

Asked if he thought the economic policies of Thatcher and Reagan were still relevant, he said: “[Reagan and Thatcher] achieved a lot when they were in office and they were committed to lower taxes. They were committed to cutting regulation and that’s certainly what I’ve been committed to as well.”

But trade unions and businesses that are still suffering as a result of border closures and restrictions, particularly in the tourism and entertainment sectors, have warned that the scheme’s closure will dent the economy.

“JobKeeper should be extended for those businesses that are still affected by coronavirus. [Through] no fault of their own, they are suffering that downturn,” said Sally McManus, secretary of the Australian Council of Trade Unions, last week. “And we say that because that will save jobs.”

Josh Frydenberg, Australia’s treasurer, is a rising star in the country’s conservative government and is tipped as a future prime minister © AP

Frydenberg, who was the architect of foreign investment rules aimed at countering rising Chinese influence, said he made no apologies for putting “national interest” at the heart of Australia’s investment policies.

Chinese investment fell 61 per cent last year to A$1bn, down from A$2.6bn in 2019 and a peak in 2016 of A$16.5bn, data showed. Frydenberg was instrumental in blocking two potential deals: China Mengniu’s A$600m bid for Japan-owned Lion Dairy and China State Construction Engineering Corp’s A$300m bid for Probuild, a South Africa-owned construction company.

“We absolutely reserve the right to make decisions around foreign investment based on national interest and having put in place an explicit national security test allows us to do that,” he said.

“Increasingly we’ve seen foreign investment proposals that have been motivated not by purely commercial gains but more strategic ones. When those foreign investment proposals potentially compromise the national interest, then we reserve the right to say no.”

Frydenberg said Australia was not alone in tightening its rules, noting that other countries shared Canberra’s views on national sovereignty and foreign investment.

“Obviously we have had some challenges with China,” he said when asked about Beijing’s imposition of trade sanctions on a range of Australia’s exports following Canberra’s call last year for an inquiry into the origins of Covid-19 in Wuhan.

Frydenberg insisted that Australian ministers were prepared to sit down with their Chinese counterparts to discuss the bilateral relationship but only on a “no conditions attached” basis.

“It is a mutually beneficial trading relationship — we supply the bulk of their iron ore and that iron ore has helped underpin their economic growth,” he said.

Frydenberg is a rising star in Australia’s conservative government and is tipped as a future prime minister.

Last week, he shot to global attention following several days of negotiation with Facebook’s Mark Zuckerberg over the social media company’s decision to block news on its platforms in Australia in response to a law forcing it to pay news publishers.

On Friday, Facebook “refriended Australia” and returned news to its Australian platform following amendments that may make it easier for the company to avoid the toughest elements of the law.

“Trying to negotiate with these guys is a bit like playing chess against a chess master,” said Frydenberg, who joked that he spoke to Zuckerberg more than his own wife last week.

“The reality is they are massive companies with huge balance sheets and global reach. If this was easy other countries would have done it [made Big Tech pay for news] long ago.” 

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Emerging Markets

Ecuador’s exporters caught between US and China after debt deal




Exporters in Ecuador are worried that their all-important trade with China will suffer as a result of a controversial agreement the US says is aimed at shutting China out of the South American country’s 5G telecoms network.

The agreement, signed by the US International Development Finance Corporation (DFC) and the Ecuadorean government just days before Donald Trump left office in January, envisages the US buying oil and infrastructure assets in Ecuador on the understanding Quito uses the proceeds to pay off its debt to China.

It also obliges Ecuador to sign up to what the Trump administration called the “Clean Network” — a state department initiative designed to ensure that nations exclude Chinese telecoms services and equipment providers as they build out their high-speed 5G mobile networks.

Adam Boehler, the recently departed chief executive of DFC, has described the deal as a “novel model” to eject China from the Latin American nation.

But it has caused unease in Ecuador, which has become increasingly reliant on exports to China.

“The announcement has generated a lot of inquiries and a lot of doubts,” said Gustavo Cáceres, head of the Ecuadorean-China Chamber of Commerce (CCECH). “We hope our authorities handle this in the best way possible so as not to give the impression that we’re turning our backs on China.”

One of the smallest countries in South America, Ecuador has traditionally exported primarily to the US and Europe, but China is fast catching up. Its share of Ecuador’s exports jumped from 3.9 per cent in 2015 to 15.8 per cent. In the same period, the US’s share fell from 39.4 per cent to 23.7 per cent.

The Chinese buy oil, shrimp, bananas, cut flowers, cacao and timber from Ecuador. Last year, despite the coronavirus pandemic, Ecuador’s exports to China grew more than 10 per cent and, for the first time, the country boasted a trade surplus with Beijing.

The shrimp industry has become particularly important. Since 2016, Ecuador’s shrimp exports worldwide have jumped 86 per cent. The nation of just 17.4m people is now the largest exporter of shrimp in the world, having overtaken India last year, when it exported 676,000 metric tonnes of the crustaceans in trade worth $3.6bn. After oil, shrimp were the country’s most lucrative export commodity.

Over half of that went to China, which, with its expanding middle class, is acquiring a taste for seafood once seen as a luxury.

“China will remain our main market,” forecast José Antonio Camposano, president of Ecuador’s National Chamber of Aquaculture (CNA), which oversees the industry. “We need a smart approach to China. A market of 1.4bn people with the acquisitive power that the Chinese have? I’m a businessman, how can I say no to that?”

The CNA was sufficiently worried by Ecuador’s agreement with the US that it sent a three-page letter to Ecuador’s president Lenin Moreno reminding him of China’s buying power.

While the letter did not mention the DFC deal directly, it urged Moreno — who in his four years in power has shifted Ecuador’s axis away from Beijing and towards Washington, reviving relations with the IMF and renegotiating the country’s debt to bondholders — “to reinforce with senior Chinese leaders the point that the excellent relationship between Ecuador and China remains intact”.

Freshly caught shrimp being packed into containers in Ecuador in 2011
Ecuador’s shrimp industry has fed a growing appetite among China’s expanding middle class © Bloomberg

China’s ambassador to Ecuador, Chen Guoyou, said he was unconcerned by the DFC deal and described media reports that it excluded Chinese companies from Ecuador’s telecoms network as “over-interpretation and gratuitous assumption”.

“China respects the sovereign and independent decision of the Ecuadorean government to develop pragmatic, balanced and diverse partnerships with other countries,” he told the Financial Times in an email.

Responding to his comments, one of the former Trump administration officials who negotiated the deal said it had been made explicitly clear in the text that the agreement was contingent on the country participating in the “Clean Network” — which would prevent it from including Huawei or any other Chinese company in its telecoms network.

The future of the deal, and indeed Ecuador’s future relations with China and the US, will depend in part on the outcome of the country’s presidential election on April 11. It pits leftwing economist Andrés Arauz against Guillermo Lasso, a conservative former banker. 

Arauz has the backing of Rafael Correa who took Ecuador out of the US’s orbit and pushed it towards China while serving as president from 2007 until 2017. He broke off relations with Washington’s financial institutions and signed a series of loans-for-oil deals with the Chinese. If Arauz wins the election he is likely to seek support from Beijing and might rip up the DFC agreement, particularly now Trump is no longer in office.

In contrast, Lasso told the FT previously the deal was “a pleasant surprise” and “good news” for Ecuador.

“It’s clear that the US is our principal ally and in my government I would look for an even closer alliance with the US,” he said.

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Brazil virus variant found to evade natural immunity




The P.1 Covid-19 variant that originated in Brazil and has spread to more than 25 countries is around twice as transmissible as some other strains and is more likely to evade the natural immunity people usually develop from prior infection, according to a new international study.

The research, conducted by a UK-Brazilian team of researchers from institutions including Oxford university, Imperial College London, the University of São Paulo, found that the P.1 variant was between 1.4 and 2.2 times more transmissible than other variants circulating in Brazil. 

It was also “able to evade 25-61 per cent of protective immunity elicited by previous infection” with any earlier variant, the researchers found, in a sign that current vaccines could also be less effective against it.

International concern about the P.1 variant has escalated recently, with more than 25 countries detecting the variant, including Belgium, Sweden and the UK, which has identified six cases.

The scientists are expected to release a paper describing the research on Tuesday. Dr Nuno Faria, the lead author, did not immediately respond to a request for comment. The study has not yet been peer reviewed.

The researchers have dated the emergence of the P.1 variant to November 6, 2020, around one month before cases began to surge for a second time in the Brazilian city of Manaus. They found that the proportion of cases classified as P.1 in Manaus increased from zero to 87 per cent in the space of 7 weeks. 

The paper concluded: “Our results further show that natural immunity waning alone is unlikely to explain the observed dynamics in Manaus, with support for P.1 possessing altered epidemiological characteristics.”

“Studies to evaluate real-world vaccine efficacy in response to P.1 are urgently needed,” it added.

The researchers also found that infections were 10 to 80 per cent more likely to result in death in Manaus after the emergence of P.1. However, the authors cautioned that it was not possible to determine whether this meant the variant was more lethal or whether it was a result of increased strain on the city’s healthcare system, or a combination of both. 

The P.1 variant has over 17 mutations, which alter its genetic sequence from the virus originally identified in Wuhan, including 3 key changes to the spike protein that it uses to enter human cells.

Researchers in Brazil have been using genetic sequencing technology developed by Oxford Nanopore in the UK to identify and track the variant. The technology was first used in Brazil during the Zika outbreak in 2015.

Dr Leila Luheshi, director of applied and clinical markets at Oxford Nanopore, told the Financial Times that while the B.1.1.7 variant in the UK has similar properties of high transmissibility to P.1 — it is thought to be around 1.5 times as transmissible as variants that preceded it — there was no evidence to date that it evaded past natural immunity in the same way. Studies so far have also shown that current vaccines retain their efficacy against B.1.1.7.

Luheshi said that the concern with P.1 is that “because it has these mutations around the spike . . . the hypothesis is that the vaccine will be less effective.” But she added that there is not yet definitive evidence to support this theory. 

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